IDS acts as the investment adviser and exclusive distributor for these open-end mutual funds. I believe it is accurate to say that from almost any point of reference, the Investors Group of companies is preeminent in the face amount certificate and the mutual fund industry. Investors Mutual, Inc., is the world's largest mutual fund, having assets currently in excess of $2 billion. Investors Stock Fund, Inc.'s assets at the present time are a little in excess of $1 billion. Assets under the management of, or for which IDS acts as investment adviser, exceed $4 billion. The face amount certificate business conducted by Investors Syndicate of America, Inc., represented certificate liabilities of approximately $575 million as of May 31, 1963, which represented scheduled maturities of over $2 billion. IDS maintains a nationwide sales organization of approximately 3,400 sales representatives, district managers, and divisional managers. There are approximately 160 divisional offices throughout the country. The five mutual funds for which IDS is the investment adviser and exclusive distributor represent approximately 15 percent of the assets of all such funds reporting to the Investment Company Institute, which in turn represents approximately 95 percent of all open-end mutual fund assets. For the past several years IDS has produced about 15 percent of annual gross sales in the open-end fund industry, and because of its favorable redemption rate, this represents closer to 20 percent of all sales net of redemptions. There are presently over 780,000 shareholder accounts in the mutual funds distributed by IDS, and there are almost 400,000 holders of face amount certificates issued by Investors Syndicate of America, Inc., or IDS. IDS POSITION In view of this tremendous participation in the investment industry and in view of its responsibilities to the welfare of its many customers, IDS is vitally interested in the proposals contained in Senate bill 1642 and particularly in the proposal that any broker-dealer registered under the Securities Exchange Act of 1934 must be a member of a securities association which is registered pursuant to section 15A of that act. We are pleased to observe that as proposed, the bill does not require membership in the National Association of Securities Dealers, Inc., which is the only securities association now registered under the Securities Exchange Act of 1934, but on the other hand is cast in terms which recognize the right of a brokerdealer to belong to any association which might be formed and so registered. We are also pleased to note that the bill would give the Securities and Exchange Commission the power, unconditionally, or upon specified conditions, to exempt any broker or dealer or any category thereof from this requirement. We feel that the opportunity to join or form an association other than the National Association of Securities Dealers or perhaps not to join any association is salutary for many reasons. Primarily, we believe that the National Association of Securities Dealers was conceived and is operated with the general securities business in mind and was and is not geared to the distribution of mutual fund shares. We believe that the problems attendant upon the distribution of mutual fund shares are in most respects unique to that type of operation and need separate and distinct treatment from that generally afforded to the public distribution and trading of securities, whether traded over the counter or listed on national exchanges. Second, the distribution of mutual fund shares is effected in one of two basic patterns. In one case, sales are effected through a selling organization of regular broker-dealers, members of the National Association of Securities Dealers, who are offered price concessions by a wholesaler of the shares of the fund in question and who ordinarily conduct their operations along the lines of the traditional broker-dealer. The other method of distribution is that employed by IDS, where it built and operates its own independent sales organization composed of sales representatives who distribute the securities of the Investors Group exclusively and do not engage in the securities market in any other fashion as would a normal broker-dealer. There is a natural competition and rivalry between representatives of these two different types of distribution and it seems extremely doubtful that one association can be chartered and can devise rules equally and fairly applicable to both types of operations, and it seems even less likely that the government of such an association can be fairly apportioned so as to give proper representation to both types of operation. This last observation is underscored by the traditional dominance of the National Association of Securities Dealers by representatives of what might be termed the normal brokerdealer engaging in general securities business. Third, the self-enforcing and disciplinary procedures of the National Association of Securities Dealers seem largely oriented to the problems of the general securities business, and subjects such as markup policies, free-riding, transactions between members and nonmembers, and other problems of that nature. We do not believe that anywhere else is there a detailed and specific program of good standards and practices in the distribution of mutual funds which is coupled with an effective mechanism for the enforcement of these standards and practices which comes even close to comparing with these elements of the IDS program. The practices and standards, the enforcement thereof and the methods of selection and training of sales representatives which IDS has developed over the years and which it vigorously enforces at a cost in excess of $500,000 per year is, we feel, unique. We cannot believe that in any alteration of its existing rules or in any new rules that it might adopt the National Association of Securities Dealers would make applicable to all of its members training and selection requirements, standards and practices of conduct, and policies of enforcement which would even approximate those presently in effect at IDS. Finally, membership in the National Association of Securities Dealers would saddle IDS with excessive and wholly unnecessary entrance, membership, and examination fees. We estimate that these fees and expenses would be in excess of $100,000 the first year of IDS membership. As I have indicated IDS already spends large sums each year to insure compliance with its operating and sales standards which, as we have stated, we feel far exceed any imposed by the National Association of Securities Dealers upon its members. This needless duplication of expense, with no possible benefit to the customers of IDS or its fund companies seems completely unjustified. If the effect of this legislation would be to require membership in the National Association of Securities Dealers and if alternative arrangements, either by way of a new association independent of the National Association of Securities Dealers or by other means, were not available, IDS would be forced to take a position in opposition to this feature of the proposed legislation. May I express the appreciation of my company for this opportunity to State its views to your subcommittee. We hope that they will be constructive and helpful to you in recommending sound and salutary legislation. We are deeply involved in the mutual fund industry, and we believe most sincerely that our industry furnishes an efficient and effective way for the people of our country to participate in our economic system. In turn, this participation stimulates the system to work for the benefit of all of our citizens. Good and thoughtful legislation designed to encourage the mutual fund industry and good practices and high standards in its operation cannot produce anything but beneficial results. If you or your committee feel that any further information or expansion of the views expressed herein would be helpful, we would be most happy to cooperate in any way whatsoever. Cordially, THOMAS W. MOSES. STATEMENT OF NATIONAL ASSOCIATION OF LIFE COMPANIES, INC., IN OPPOSITION TO S. 1642 National Association of Life Companies, Inc., submits its statement in opposition to S. 1642. This association is composed of life insurance companies of medium and smaller size throughout the United States. A list of the membership is attached as exhibit A. The association can be said to represent, generally speaking, the viewpoint of the smaller life insurance companies. The proposed legislation will damage the interests of the members of this association without just or sufficient cause demanding such damage. The results anticipated from the legislation are considerable and grave. In support of the statements just made the following considerations are submitted to the committee: 1. THE PROPOSED LEGISLATION WILL IMPOSE AN INTOLERABLE COST ON SMALLER LIFE INSURANCE COMPANIES The members of the committee are aware of the cost of filing a registration with the SEC. In addition to a detailed and extensive audit it is necessary that costs be incurred for attorneys fees, printing costs, travel expense, and other like expense. Costs of registration have run roughly speaking anywhere from $20,000 to $50,000. If the members of the committee would look at "Best's Life Insurance Reports" they would find that a great many life insurance companies of sufficient size to be covered by the proposed legislation do not ordinarily have net earnings exceeding the amount of costs which such a registration would involve. It is, therefore, of great concern that for many of the members of this association the costs of this registration will take from the stockholders conservatively speaking a substantial part of the net earnings of their company for the year in which the registration is effected. Surely the committee does not intend for any such result as this to follow. 2. THE BUSINESS OF LIFE INSURANCE IS OF SUCH AN ECONOMIC CHARACTER THAT THE ORDINARY PROCEDURES OF SEC FILING ARE INCOMPATIBLE (a) Specially informed experts are required to determine operating results of life insurance companies Certified public accountants do not as such deal with the fiscal affairs of life insurance companies. It is not possible to determine the results of operations of such companies from year to year, except through the extensive use of actuaries who are specially trained in dealing with mortality tables, policy forms, and the like. The heart of the operation of a life insurance company depends upon wise handling of its reserves. The amount of reserves to be carried is solely and purely a matter of opinion which must be determined by actuaries. A company can show a profit or a loss. depending altogether on the amount of reserves which its actuary sets aside. For this reason it is almost pointless to require that independent certified public accountants make an audit of the company affairs each year. Not only does such an audit not reach the heart of operations of a life insurance company, it is also true that an audit of a life insurance company is made more expensive because it must be accompanied by special attention from actuaries in order that the audit will make any sense at all. It is also true that life insurance companies have this unique characteristic: When they are young companies the success of the company may be said in a real sense to depend on the company expending a large amount of its surplus without showing a profit. It is well known that the cost of putting life insurance on the books always exceeds the immediate returns to be expected by the company. A company that is too successful in its sales program will soon expend its surplus. A company could show a profitable year by simply investing its funds and making no sales. Thus life insurance companies fall into a different category in a fiscal sense and in what may be reasonably expected from them from year to year in order to produce favorable results for their stockholders. (b) The proposed legislation imposes an unfair burden on stock life insurance companies in comparison with mutual life insurance companies As may be verified by a reference to the "Life Insurance Fact Book" the largest companies by far writing life insurance in this country are mutual life insurance companies. The stock companies have only a fractional part of the total business. The "giants" are almost all mutual. On the contrary, while there are some large stock life insurance companies, the largest number of stock life insurance companies are small in comparison with the mutual companies. The proposed legislation will add to the already heavy burden of competition which stock life insurance companies have in competing with mutual life insurance companies. There is not only the considerable expense of filing a registration, but also the burdens of regulation which must necessarily follow from all such companies being under the jurisdiction of the SEC when their large competitors, the mutual life insurance companies, are not under such jurisdiction. If the members of the committee feel that the interests of the economy require that stock life insurance companies continue to grow and prosper they will give considerable weight to the point made here. We would bring to the attention of the committee that it is only through the continuing process of new companies being formed that vigor and imagination are kept in the life insurance business. The large companies, whose fortunes are already made, have no interest in experiments or in adjusting their practices to the ever-expanding needs of the present. We plead that the committee will give consideration to this factor of public interest in its handling of this legislation. (c) Life insurance companies, like banks, have special regulatory bodies governing them, and the proposed legislation is not justified in their case The legislation will exempt banks from the control of SEC and place jurisdiction entirely in the hands of the Federal authorities who now regulate banks. Some such disposition as this it is submitted should be made in the case of life insurance companies. The committee is well aware of the fact that each State has an insurance commissioner or board which has powers of life and death over the operation of life insurance companies in the State. The proposed legislation inevitably will create conflicts as between the orders of State regulatory authority and the SEC. Nothing but trouble can be expected from the legislation in this connection so far as life insurance companies are concerned. This trouble does not arise from any evil inherent in the situation which needs to be corrected, but arises from the inevitable situation that life insurance companies will have to seek to follow the dictates of State agencies on the one hand and of a Federal agency on the other which has no peculiar knowledge of life insurance companies. It is evident that the SEC has no means of acquiring the peculiar and involved knowledge which is necessary for the prosperous operation of a life insurance company. Decisions involving such companies require delicate adjustments of various factors, none of which can be within the contemplation of the SEC experts. (d) The proposed legislation would act as a brake on commerce Clearly it is in the interest of the country to encourage transfers of securities so that commerce may be increased rather than impeded. The proposed legislation will necessarily bring about the result that companies which are near the line in respect of assets or stockownership will do everything within the power of the management and in the interest of existing stockholders to keep on the side where they will not fall within the purview of the legislation. It is submitted that this is not a good result from the standpoint of the national inerest. (e) This proposed legislation will add another column of the already huge edifice of Federal jurisdiction and power It is perhaps considered somewhat out of fashion to call attention to the fact that more and more Washington is shutting the power of States off and taking over to itself the regulations which previously had been left to local authorities. It is perhaps a late date to put in a plea for the preservation of the joint system of government which up to recent years had done so well for this country. In seeking to remedy what may appear to be isolated cases of fraud or the like it is, we submit, a mistake to rush into yet one more instance of setting up a central authority to control local matters. This proposed legislation would impose upon companies which do not seek to sell new issues of stock, merely because their issues are traded in local over-the-counter trading, a perpetual burden of supervision from Washington. It is earnestly urged that the members of the committee consider carefully the benefits to be expected from the legislation in the light of the unfortunate results to be expected as pointed out in this memorandum. We, therefore, request that the committee so deal with the legislation that these results in the case of smaller life insurance companies may be avoided. Respectfully submitted. NATIONAL ASSOCIATION OF LIFE COMPANIES, INC., By DEVEREAUX F. MCCLATCHEY, Hon. HARRISON A. WILLIAMS, General Counsel, Atlanta, Ga. CHAMBER OF COMMERCE OF THE UNITED STATES, Chairman, Securities Subcommittee, DEAR SENATOR WILLIAMS: The Chamber of Commerce of the United States supports the principle of free, private enterprise with a minimum of governmental controls. However, because of the growing number of shareholders in our country, it is in the public interest to provide for reasonable and proper disclosure of certain operations of corporations with substantial stockholder ownership. For this reason, we support, with exceptions as indicated hereafter with regard to banks and insurance companies, amendment of the Securities Act of 1933 and the Securities Exchange Act of 1934, as proposed by certain sections of S. 1642, to extend disclosure requirements to the issuers of unlisted publicly held securities sold over-the-counter as follows: (a) Requirements, involving application of reporting, proxy solicitation, and insider trader requirements, would be made applicable initially to companies with $1 million in assets and 750 shareholders and, after 2 years, shareholder minimum would be reduced to 500. (b) The over-the-counter market would be made subject to controls comparable to those which the SEC exercises over exchange markets. One type of business which does not require additional regulation is the insurance business. We urge its exemption from the disclosure requirements of S. 1642. The insurance companies which would be affected by the SEC proposal are now subject to extensive and detailed regulation, examination and reporting requirements by the various States. The addition of Federal regulation on top of State regulation should be undertaken only if a pressing need is clearly demonstrated. This need has not been demonstrated. In the process of examination by the States, all records of insurance companies are open, including stock records, board and stockholder minutes and notices, and records of compensation, including pension and similar plans. In annual statements, subjects such as loans to officers, compensation of officers, and conflicts of interest are covered by interrogatories. The financial transactions and condition of individual companies are presented in detail. It is a basic misconception that the financial reporting in the annual statements of insurance companies does not meet the needs of the investors and that the information required by the SEC would meet this need. We are sure that the SEC recognizes that the mass of reporting required by the States provides policyholders great protection and that, collaterally, the reports required by the States also afford protection to the stockholders against questionable business practices and company insolvency. In this regard, it should be noted that the National Association of Insurance Commissioners has appointed a subcommittee of its laws and legislation committee to examine the SEC proposal to determine whether there is any void in State legislation and, if so, what steps should be taken by the State regulatory authorities. Congress should have the benefit of this study before considering regulatory legislation affecting insurance companies. For these reasons, we urge the exemption of insurance companies from the relevant provisions of S. 1642. S. 1642 also would extend disclosure coverage to another heavily regulated business-banks. It is unnecessary and superfluous to add another Federal agency to the group that now regulates banks. S. 1642 should be amended to make it mandatory that the full and final authority for disclosure of information on banks be assigned by statute to the various Federal banking agencies, i.e., Federal Reserve System, Comptroller of the Currency, and Federal Deposit Insurance Corporation. I sincerely hope that you will give these recommendations serious consideration, and will make this letter a part of the record of your hearings on S. 1642. Sincerely, THERON J. RICE, Manager, Legislative Department. (The following material was furnished by SEC:) SECURITIES AND EXCHANGE COMMISSION, Re technical corrections in S. 1642. Assistant Counsel, Senate Committee on Banking and Currency, Washington, D.C. DEAR MR. LowE: I attach hereto 2 copies of a memorandum, suggesting approximately 21 minor corrections in S. 1642. Most of these are designed to correct typographical errors or to conform language. Most of these suggestions originated within the Commission, but we have included those corrections of this nature which were called to our attention by persons outside the Commission; particularly, the Association of the Bar of the City of New York. I think there are only two of these changes which require any discussion. These are items 13 and 16. Item 13 is a modification of the exemption from sections 16 (b) and 16(c) contained in new subparagraph 16(d) of the act, and found on page 36 of the bill. This change would make it clear that the exemption is available only for a dealer in the over-the-counter market, who is making a market, and avoid any |